News Release

MINNEAPOLIS--(BUSINESS WIRE)--Jul. 20, 2016--
Graco Inc.(NYSE: GGG) today announced results for the quarter
and six months ended June 24, 2016.

Summary

$ in millions except per share amounts

Thirteen Weeks Ended

Twenty-six Weeks Ended

June 24,

June 26,

%

June 24,

June 26,

%

2016

2015

Change

2016

2015

Change

Net Sales

$

348.1

$

335.5

4

%

$

653.0

$

641.9

2

%

Operating Earnings

78.3

83.9

(7

) %

139.3

149.1

(7

) %

Net Earnings

50.9

172.6

(70

) %

90.5

241.5

(63

) %

Diluted Net Earnings per Common Share

0.89

2.90

(69

) %

$

1.59

$

4.02

(60

) %

Diluted Net Earnings per Common Share, adjusted(1)

$

0.89

$

1.05

(15

) %

$

1.59

$

1.70

(6

) %

(1)

Excludes effect of $110 million for the quarter and $139 million for
the year to date, representing net investment income from the Liquid
Finishing businesses sold in the second quarter of 2015. See
Consolidated Results below for reconciliation of the adjusted
non-GAAP financial measure to GAAP.

Sales for the quarter increased 4 percent, including 1 percentage
point from acquired operations. Strong growth in the Contractor
segment more than offset a decrease in the Process segment.

Operating earnings for the quarter decreased by $6 million, down 2
percentage points as a percentage of sales, driven by lower gross
margin rate, an increase in unallocated corporate expenses (mostly
stock compensation and non-divisional pension cost), and spending on
new product launches and other initiatives.

Net earnings in 2015 included non-recurring income tax benefits
totaling $9 million, or $0.15 per diluted share, for both the second
quarter and the year to date.

"Strong performance by our Contractor segment, particularly in the
Americas, was the primary driver for the Company's growth in the second
quarter," stated Patrick J. McHale, Graco's President and CEO.
"Double-digit growth in the Contractor segment was somewhat offset by a
decline in the Process segment, where oil and natural gas related sales
were off by nearly a third compared to the prior year. Industrial
segment sales trends in the second quarter were consistent with the
first quarter, with high single-digit growth in the EMEA and Asia
Pacific regions dampened by softer demand in the Americas. Graco's
second quarter profitability was impacted by a number of factors,
including sales mix, lower factory volume, facility moves and
integration activities, new product launches in the Contractor segment
and unallocated corporate expenses. Although overall demand trends
remain variable from region to region, and between product categories,
we remain steadfast in our commitment to investing in long-term growth
initiatives."

Consolidated Results

Changes in currency translation rates decreased year-to-date sales and
net earnings by approximately $7 million and $2 million, respectively,
and had no significant effect on results for the quarter.

Sales for the quarter increased 4 percent, with mid single-digit
percentage increases in the Americas and EMEA partially offset by a
decrease in Asia Pacific. Incremental sales from operations acquired
within the last 12 months totaled $5 million, contributing 1 percentage
point of growth. Organic sales at consistent translation rates increased
3 percent, with increases of 4 percent in the Americas and 3 percent in
EMEA and a decrease of 1 percent in Asia Pacific.

Sales for the year to date increased 2 percent, driven by an 8 percent
increase in EMEA. Incremental sales from operations acquired within the
last 12 months totaled $11 million, contributing 2 percentage points of
growth. Organic sales at consistent translation rates increased 1
percent, with increases of 6 percent in EMEA and 2 percent in Asia
Pacific and a decrease of 1 percent in the Americas.

Gross profit margin rates for both the quarter and year to date were
slightly lower than the comparable periods last year. The unfavorable
impacts of lower factory volume and product and channel mix more than
offset the favorable effects of realized pricing. Gross margin rate for
the year to date also included the favorable impact of reduced
acquisition-related purchase accounting effects.

Total operating expenses for the quarter were $10 million (10 percent)
higher than the second quarter last year, including $2 million of
incremental expenses of acquired operations. Unallocated corporate
expenses, mostly stock compensation and pension, increased $2 million.
The increase in operating expenses also included $1 million to support
new product launches, $1 million of factory and warehouse relocation
costs and approximately $2 million related to initiatives and other
corporate items. Total operating expenses for the year to date were $14
million (7 percent) higher than the comparable period last year,
including $5 million of incremental expenses of acquired operations, and
a $3 million increase in unallocated corporate expenses.

The effective income tax rate for both the quarter and the year to date
was 31 percent, up from 28 percent and 26 percent in the second quarter
and year to date last year, respectively. Last year's rate included the
favorable impact of non-recurring tax benefits, mostly related to a
change in assertion as to reinvestment of foreign earnings, and the
impact of post-tax dividend income, partially offset by the tax rate
effect of the gain on the sale of the Liquid Finishing assets.

Net earnings in 2015 included net investment income from the Liquid
Finishing businesses sold in the second quarter of 2015. Results
excluding Liquid Finishing investment income and expense provide a more
consistent base of comparison of ongoing financial results. A
calculation of the non-GAAP measurement of net earnings excluding
investment income and expense follows (in millions except per share
amounts):

Thirteen Weeks Ended

Twenty-six Weeks Ended

June 24,

June 26,

Jun 24,

Jun 26,

2016

2015

2016

2015

Net Earnings, as reported

$

50.9

$

172.6

$

90.5

$

241.5

Held separate investment (income), net

—

(158.8

)

—

(188.4

)

Income tax effect

—

49.1

—

48.9

Net Earnings, adjusted

$

50.9

$

62.9

$

90.5

$

102.0

Diluted earnings per share

As reported

$

0.89

$

2.90

$

1.59

$

4.02

Adjusted

$

0.89

$

1.05

$

1.59

$

1.70

Segment Results

Certain measurements of segment operations are summarized below:

Thirteen Weeks

Twenty-six Weeks

Industrial

Process

Contractor

Industrial

Process

Contractor

Net sales (in millions)

$

157.0

$

64.7

$

126.4

$

304.1

$

129.0

$

220.0

Percentage change from last year

Sales

2

%

(10

)%

15

%

2

%

(8

)%

7

%

Operating earnings

1

%

(45

)%

9

%

3

%

(39

)%

(1

)%

Operating earnings as a percentage of sales

2016

33

%

12

%

23

%

32

%

12

%

21

%

2015

33

%

19

%

25

%

32

%

18

%

23

%

Industrial segment sales for the quarter increased 2 percent (3 percent
at consistent translation rates). Increases of 10 percent in EMEA and 4
percent in Asia Pacific were partially offset by a 3 percent decrease in
the Americas. Year-to-date sales increased 2 percent (4 percent at
consistent translation rates), including increases of 9 percent in EMEA
(10 percent at consistent translation rates) and 6 percent in Asia
Pacific (9 percent at consistent translation rates) partially offset by
a decrease of 4 percent in the Americas. Operating margin rates for the
Industrial segment were consistent with those of last year.

Process segment sales for the quarter decreased 10 percent (9 percent at
consistent translation rates), including decreases of 7 percent in the
Americas, 10 percent in EMEA and 21 percent in Asia Pacific.
Year-to-date sales in this segment were down 8 percent (6 percent at
consistent translation rates), including decreases of 7 percent in the
Americas, 5 percent in EMEA (3 percent at consistent translation rates)
and 14 percent in Asia Pacific (11 percent at consistent translation
rates). Operating margin rates decreased compared to last year mostly
due to unfavorable expense leverage.

Contractor segment sales for the quarter increased 15 percent, with
increases of 19 percent in the Americas and 9 percent in EMEA, partially
offset by a decrease of 9 percent in Asia Pacific. Year-to-date sales
increased 7 percent (8 percent at consistent translation rates), with
increases of 6 percent in the Americas and 16 percent in EMEA, partially
offset by a 4 percent decrease in Asia Pacific. Operating margin rate
decreased in the quarter mostly due to new product launch costs and
decreased year to date due to unfavorable expense leverage and product
and channel mix.

Outlook

"Modest first half organic growth has resulted in a reduction in our
full-year outlook for 2016. We have revised our low-to-mid single-digit
growth expectation down to a new outlook of low single-digit growth,"
said McHale. "Strong headwinds in our Process segment are expected to
persist into the second half of the year, keeping us from achieving our
goal of growth in every reportable segment and region for the full year.
Although the Contractor business in the Americas continues to grow at a
high single-digit rate, we now anticipate the Americas will grow low
single digits for the full year 2016, based on Process headwinds and
continued weakness across nearly all product categories in the
Industrial segment in the Americas. After a strong first half, we are
raising our full-year outlook for the EMEA region to low-to-mid
single-digit growth, while our outlook for the Asia Pacific region
remains intact at low single digits. Ongoing choppiness in our end
markets has not changed our commitment to strategic growth through
expansion of distribution channel, development of innovative new
products, conversion of end users from manual painting techniques to
using spray equipment and expansion into adjacent new markets."

Cautionary Statement Regarding Forward-Looking Statements

The Company desires to take advantage of the “safe harbor” provisions
regarding forward-looking statements of the Private Securities
Litigation Reform Act of 1995 and is filing this Cautionary Statement in
order to do so. From time to time various forms filed by our Company
with the Securities and Exchange Commission, including our Form 10-K,
Form 10-Qs and Form 8-Ks, and other disclosures, including our 2015
Overview report, press releases, earnings releases, analyst briefings,
conference calls and other written documents or oral statements released
by our Company, may contain forward-looking statements. Forward-looking
statements generally use words such as “expect,” “foresee,”
“anticipate,” “believe,” “project,” “should,” “estimate,” “will,” and
similar expressions, and reflect our Company’s expectations concerning
the future. All forecasts and projections are forward-looking
statements. Forward-looking statements are based upon currently
available information, but various risks and uncertainties may cause our
Company’s actual results to differ materially from those expressed in
these statements. The Company undertakes no obligation to update these
statements in light of new information or future events.

Future results could differ materially from those expressed due to the
impact of changes in various factors. These risk factors include, but
are not limited to: our Company’s growth strategies, which include
making acquisitions, investing in new products, expanding geographically
and targeting new industries; economic conditions in the United States
and other major world economies; changes in currency translation rates;
changes in laws and regulations; compliance with anti-corruption laws;
new entrants who copy our products or infringe on our intellectual
property; risks incident to conducting business internationally; the
ability to meet our customers’ needs and changes in product demand;
supply interruptions or delays; security breaches; the possibility of
asset impairments if acquired businesses do not meet performance
expectations; political instability; results of and costs associated
with, litigation, administrative proceedings and regulatory reviews
incident to our business as well as indemnification claims under our
asset purchase agreement with Carlisle Companies Incorporated, Carlisle
Fluid Technologies, Inc., and Finishing Brands Holdings Inc.; the
possibility of decline in purchases from few large customers of the
Contractor segment; variations in activity in the construction,
automotive, mining and oil and natural gas industries; our ability to
attract, develop and retain qualified personnel; and catastrophic
events. Please refer to Item 1A of our Annual Report on Form 10-K for
fiscal year 2015 (and most recent Form 10-Q) for a more comprehensive
discussion of these and other risk factors. These reports are available
on the Company’s website at www.graco.com
and the Securities and Exchange Commission’s website at www.sec.gov.
Shareholders, potential investors and other readers are urged to
consider these factors in evaluating forward-looking statements and are
cautioned not to place undue reliance on such forward-looking statements.

Investors should realize that factors other than those identified above
and in Item 1A might prove important to the Company’s future results. It
is not possible for management to identify each and every factor that
may have an impact on the Company’s operations in the future as new
factors can develop from time to time.

A real-time webcast of the conference call will be broadcast live over
the Internet. Individuals wanting to listen and view slides can access
the call at the Company’s website at www.graco.com.
Listeners should go to the website at least 15 minutes prior to the live
conference call to install any necessary audio software.

For those unable to listen to the live event, a replay will be available
soon after the conference call at Graco’s website, or by telephone
beginning at approximately 1 p.m. CT on July 21, 2016, by dialing
888-203-1112, Conference ID #6816490, if calling within the U.S. or
Canada. The dial-in number for international participants is
719-457-0820, with the same Conference ID #. The replay by telephone
will be available through July 25, 2016.

Graco Inc. supplies technology and expertise for the management of
fluids and coatings in both industrial and commercial applications. It
designs, manufactures and markets systems and equipment to move,
measure, control, dispense and spray fluid and powder materials. A
recognized leader in its specialties, Minneapolis-based Graco serves
customers around the world in the manufacturing, processing,
construction and maintenance industries. For additional information
about Graco Inc., please visit us at www.graco.com
or on Twitter @GracoInc.

GRACO INC. AND SUBSIDIARIES

Consolidated Statement of Earnings

(Unaudited) (In thousands except per share amounts)

Thirteen Weeks Ended

Twenty-six Weeks Ended

June 24,

June 26,

June 24,

June 26,

2016

2015

2016

2015

Net Sales

$

348,126

$

335,489

$

653,038

$

641,942

Cost of products sold

162,985

154,866

306,101

299,190

Gross Profit

185,141

180,623

346,937

342,752

Product development

15,607

14,907

30,293

30,197

Selling, marketing and distribution

56,136

50,126

108,837

101,550

General and administrative

35,056

31,699

68,516

61,883

Operating Earnings

78,342

83,891

139,291

149,122

Interest expense

4,543

4,125

9,036

9,428

Held separate investment (income), net

—

(158,833

)

—

(188,356

)

Other expense (income), net

392

(438

)

(754

)

272

Earnings Before Income Taxes

73,407

239,037

131,009

327,778

Income taxes

22,460

66,400

40,510

86,300

Net Earnings

$

50,947

$

172,637

$

90,499

$

241,478

Net Earnings per Common Share

Basic

$

0.92

$

2.96

$

1.63

$

4.12

Diluted

$

0.89

$

2.90

$

1.59

$

4.02

Weighted Average Number of Shares

Basic

55,634

58,235

55,514

58,608

Diluted

57,040

59,622

56,875

60,044

Segment Information

(Unaudited) (In thousands)

Thirteen Weeks Ended

Twenty-six Weeks Ended

June 24,

June 26,

June 24,

June 26,

2016

2015

2016

2015

Net Sales

Industrial

$

156,997

$

153,502

$

304,085

$

296,768

Process

64,706

71,946

128,991

139,627

Contractor

126,423

110,041

219,962

205,547

Total

$

348,126

$

335,489

$

653,038

$

641,942

Operating Earnings

Industrial

$

51,052

$

50,738

$

96,846

$

93,678

Process

7,634

13,988

14,911

24,486

Contractor

29,364

27,040

46,107

46,415

Unallocated corporate (expense)

(9,708

)

(7,875

)

(18,573

)

(15,457

)

Total

$

78,342

$

83,891

$

139,291

$

149,122

The Consolidated Balance Sheets, Consolidated Statements of Cash Flows
and Management's Discussion and Analysis are available in our Quarterly
Report on Form 10-Q on our website at www.graco.com.